Shockley Semi-Conductor Lab – First Startup Shut Down that gave Rise to Silicon Valley

Every day, new startups rise with motive of either solving some existing problem or providing new solutions / researches to mass. Surveys comprehend that the success percentage of startup is approximately 1% that means 99% of the startups get shut down. Whatever may be the reason of startup shutdown – business model failure, financial failure, management failure or other reason, it leads to learning and rise of other feasible concepts, entrepreneurs and opportunities in the market. Shockley Semi-Conductor Lab was the first startup whose shutdown gave rise to the present Silicon Valley. FS brings an analysis how it was born, became popular and finally shut down.

Silicon Valley in 1940s

In 1940s there were no multi billionaire venture capital firm and stock option millionaires who could bet on the success of ideas. Money was there but courage to take risks was absent. There were no big ventures like Google or Apple or Amazon either. Then also men graduated from big ivy league colleges and Nobel prizes were big recognition but there lesser forums which could afford a supporting hand to entrepreneurs. Getting a job meant being loyal to the job provider. Seldom people looked to switch jobs however tough the job conditions might be.

Transistor Discovery and Opportunity Ahead

That day Silicon Valley was nonexistent and there were hardly any company in San Francisco which was famous for its work in the field of transistor technology. Around late 1940s, there was a research in AT&T which gave birth to transistor. 3 people associated with the research were awarded Nobel Prize in 1956. One of them was William Shockley who decided to mass produce his research. He took decision to shift from East coast to west coast due to personal call of looking after his mother who was aging and was often ill.

Challenges in front of Shockley

Building a successful enterprise required three things – Investors or financing, talented work force and target customers. Paulo Alto area had constraint in terms of all three.

Venture Capital & Customers – There were no venture firms. U.S military often supported and funded the high technology firms in that area and also acted as the only customer. But then also only a small portion of funding and contracts from army were given to the companies in nearby area. Bay area was even lagging well behind the state leaders – Los Angeles and San Diego, in terms of received more funding for high-tech research and production.

Talent – In those days engineers and researchers associated with knowledge in transistor technology were present in those areas where work was being done in transistor technology. Though there were some tech firms in Bay area, but these firms worked on technologies were very different from those in the transistor.

So getting required work force was a challenge. Though Stanford University was there, but with no infrastructure availability related to transistor research assured that students would not have any exposure to transistor technology.

Shockley Got the Investor

Shockley had become convinced that the natural capabilities of silicon meant it would eventually replace germanium as the primary material for transistor construction. Texas Instruments had recently started production of silicon transistors (in 1954), and Shockley thought he could do one better.

Initially he got a sponsor in Raytheon but after one month of initial talks new sponsors were out of the board.

When Shockley told about his decision of going ahead with silicon based transistor mass production to Arnold Beckman (Beckman laboratory fame), Beckman agreed to back Shockley’s efforts in mountain view area, under the umbrella of his company, Beckman Instruments. Beckman invested around $10 million in Shockley’s company. Initially Beckman has a belief that Shockley had no chance with his inventions but he avoided handing Shockley over to competitors. Beckman also believed that Shockley’s invention would eventually help Beckman instrument in some way.

Shockley Got the Talented Team

When Shockley’s colleagues at Bell lab showed no interest in joining him at west coast, Shockley published advertisement in newspapers. He received a total of 300 responses and some 15 people. This search yielded eight promising researchers and engineers who formed the core of his new firm. They included three PhDs from MIT in Boston, a PhD and a professor from Caltech in Southern California, two engineers from the New York area, and one local PhD from Stanford. In comers were Sheldon Roberts from Dow Chemical, Robert Noyce from Philico and Jay Last who was an intern at Beckman Instruments. Blank, Last, Moore, Noyce and Roberts started working in April–May, and Kleiner, Grinich and Hoerni came during the summer. All of them were in early thirties and they all were awestruck by the idea of working for the “Inventor of Transistor”. “It was like picking up the phone and talking to God,” said Robert Noyce, one of the MIT PhDs. “He was absolutely the most important person in Semiconductor electronics.”

Shockley Semi-Conductor Lab

In 1956 with a team of 31 people Shockley started his expedition of manufacturing bipolar transistors under the umbrella of Beckman instruments. Shockley initiated quite well but over the period of few months he took some drastic decisions –

Though he initially started on the same line but somehow got infatuated by the problem of “Shockley diode”. He kept the financial interest of Beckman to negligence and started working on the Shockley diode.

Shockley decided that he would not hire any support technical staff to assist the original team in testing related activities.

Fallout of Shockley’s Bad Managerial Skills

William Shockley’s great physics genius didn’t translate into management genius. He was a pathetic manager. He saw competition in even the people working under him. He was prone to unprovoked outburst of anger. All phone calls were recorded. The staffs were not allowed to share their results with each other, which was virtually impossible since they worked in a small building. Shockley would send their reports to Bell Labs for double-checking.

Then there were two major incidents which made life difficult for team to work for William Shockley –

One was an incident in the laboratory at 391 San Antonio Rd., an unofficial local landmark, where a secretary cut her hand on a broken push pin. The minor accident led to an investigation by Shockley, who thought it was a malicious attempt by the team members at laboratory to sabotage their work. Shockley hired detectives and the entire staff had to take lie detector tests which everybody obviously refused.

Second crucial point came after a meeting with Shockley’s main investor, industrialist Arnold Beckman. Shockley had an outburst on question of controlling the growing research cost. Shockley told Beckman that if he didn’t like how he was running things, Shockley could take his team, get more funding and leave. But the eight key members of the team later called up Beckman to tell him that was not the case. They asked him to put someone else in charge. Though agreeing initially Beckman later on told them that he would stick to Shockley.

New York Twist and Beginning of Misery for Shockley’s Lab

In March 1957, Kleiner took a flight to New York on pretext of attending and exhibition at Los Angeles. Shockley had no idea what was cooking in the mind of young Kleiner, who had meetings with few investors for the new venture. Kleiner was supported by Blank, Grinich, Last, Roberts, Hoerni and Moore. Arthur Rock and Alfred Coyle from Hayden, Stone & Co. became interested in the offer, believing that trainees of a Nobel laureate were destined to succeed.

Then came May’1957 and team reported Beckman with an ultimatum that either replace Shockley from management or they all would leave the company. Beckman initially persuaded them about putting a manager between the team and Shockley but later back tracked the decision. He thought it would be a bad decision from his side and would be against the career of Shockley.

Noyce initially took the side of Shockley and offered to act as the icebreaker between the team and Shockley. But somehow in June 1957 he also joined the team of rebels. In June team of eight held a meeting with Rock and Coyle at California and decided to go ahead for making a new company which would focus on the research in field of silicon based transistor.

Shockley’s Lab Succumbed to the Shock Exit

Exit of Eight most talented young team mates worked against the Shockley’s lab. His decision of not mass producing the silicon transistor was already a financial failure. In 1960 though Shockley transistor came to the stage of mass production but the time was lost and competitors were close to developing integrated chip. In 1961 Shockley Lab, which was unprofitable, got sold to an investor from Cleveland. Shockley got injured into a car accident and later left the company for teaching at Stanford. In 1969, IT&T , decided to relocate the company to Florida which was opposed by most of the employees. And on refusal to move, company ceased to exist.

Next Chapter – Fairchild Semiconductor

Then it rose the “Traitorous eight” and their legacy. They went on to built an environment which led to startup boom, they went on to create an ecosystem where “risking in ideas and getting success” became a trademark, they went on to create “Silicon Valley”.

Finally eight young graduates who left the “Shockley Semi-Conductor Labs” to work on their own idea built Fairchild semiconductor.

Ultimately, New Company was built on the ruins of Shockley Semiconductor Labs. It was the first startup shutdown of modern startup history.

Learning

The major factor of Shockley failure was his bad managerial skills. An organization might have the best available machines, infrastructure, research and development papers and resources, business models etc but ultimately it’s the manpower / internal customers that integrates all the factors to produce results. To manage the relationship with internal customers is as important as with external consumers. “Clients do not come first. Employees come first. If your take care of your employees, they will take care of the clients.” – Richard Branson

So as a good customer relationship manager, founders and entrepreneurs must focus on the interests of internal customers as well as consumers. Once both are balanced, the startup will accelerate on right track of success.

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